Jim Flaherty the latest to leap into ‘innovation gap’

Five Canadian finance ministers have tried to crack the productivity puzzle. All failed. Now Jim Flaherty is taking a stab at it.

Here is the conundrum: We don’t use our brainpower to create new wealth. We have a highly educated population, generous tax incentives for research and development and lower corporate tax rates than any leading economic power. Yet our businesses remain reluctant to invest in new products and technologies (with a few honourable exceptions such as Research in Motion, Bombardier and Magna). They don’t even capitalize on the exciting discoveries made in our universities and government laboratories.

This is a formula for minimal economic growth. We have an aging population and a fading manufacturing sector. We can no longer count on cheap energy or a ready American market for our exports.

Flaherty clearly gets it. He devoted a large portion of last week’s federal budget to measures to encourage innovation, support young entrepreneurs and create the economy of tomorrow.

The trouble is, he is following the same course as his predecessors – Michael Wilson, Don Mazankowski, Paul Martin, John Manley and Ralph Goodale – cutting red tape, lowering corporate taxes, handing out research grants, putting money into higher education and subsidizing leading-edge science.

We’ve seen the result of these policies for 25 years. Business takes Ottawa’s tax cuts, insisting it needs more to stay competitive. It hails each new innovation strategy (Achieving Excellence; Compete to Win; Advantage Canada – there are enough to fill a bookcase). But it doesn’t respond.

Economists are starting to ask what’s wrong. Canada ranked 14th in business spending on research and development – behind all the world’s leading industrial powers and even smaller nations such as Belgium and Ireland – in the latest statistical roundup by the Organization for Economic Cooperation and Development.

Kevin Lynch, who served as Stephen Harper’s top adviser from 2006 to 2009, has just written an article in Policy Options, an influential magazine, laying the blame squarely on corporate Canada. He argues that, unless business leaders do their part, it makes little sense to go on spending billions of dollars on research and development. “In an era of fiscal constraint, there has to be a compelling narrative to justify new public investments when other areas are being constrained,” he says.

Flaherty appears to have gotten the message. He promised in last week’s budget to conduct a “comprehensive review” of Ottawa’s research incentives, in close consultation with business leaders and his provincial counterparts.

This pledge would have been more reassuring if he had set a timetable. But the government is still “developing the terms of reference for the review.”

It would have carried more weight if he had mentioned it in his budget speech. But it was buried in a budget background document written by bureaucrats.

And it would have held more promise if Flaherty were reaching out to society’s real creators and innovators. A panel of business magnates and government officials is extremely unlikely to recommend that Ottawa stop giving tax relief to companies that don’t contribute to the country’s future economic success. Nor is it likely to propose a radical policy shift that might ruffle corporate feathers or require risk-taking in Ottawa.

In Flaherty’s defence, productivity is a hard sell.

The term either puts people to sleep or raises their hackles. Some don’t see any immediate danger. Others don’t trust business or government to act in the public interest.

Here is why we can’t afford to tune out: Our standard of living is slipping. Our kids won’t be able to earn a good living in a static economy. Our country won’t thrive unless we raise our game.